Companies pay tax at the rate of 30 per cent, while super funds pay just 15 per cent (10 per cent on capital gains). This 30 per cent tax if fully paid, becomes a tax credit attached to a fully franked dividend, or if part company tax is paid, which not only offsets the tax on the dividend but on some of the fund’s other income as well.
Take Janice, aged 52, who has a $400,000 total in SMSF (60 per cent of which is invested in Australian shares).
$9600 earnings in dividends with an average franking rate of 70 per cent
$2880 is what those franking credits would be worth (30% of $9600)
$50,000 of concessional (employer) contributions are made (current max while over 50)
$8000 earnings from other investments
Less $2645 tax deductions (expenses), resulting in
$67,835 taxable income of the fund (includes the $2880)
$10,175 is the normal 15% tax payable on that income but it would fall to
$7295 = tax after using the franking credits (ie take off the $2880 credit)
Without the franking credits, just the tax on John’s contributions ($50,000) alone would have been more than that – $7500.
If you’re in a public fund, franking credits still reduce the overall tax bill but because the money is pooled, you don’t have any control over it, as you do in self managed super.
Annette Sampson, The Sydney Morning Herald, Page 7 describes and explains further – The strategy: To use dividend franking credits to reduce tax paid by my self-managed super fund. How do I do that? Go To ARTICLE